Letter from the Chairman of Sub-Committee
B to Mr John Battle MP,
Minister of State for Science, Energy
Amended proposal for a European
Parliament and Council Directive concerning common rules for the
internal market in natural gas
I am writing to inform you of the preliminary
conclusions reached by Sub-Committee B after its deliberations
this morning on the above draft Directive.
As you know, the Sub-Committee conducted
an enquiry on this subject in the weeks preceding the summer recess,
taking evidence from a wide range of UK and Continental witnesses,
including yourself and officials from your Department. Most of
that evidence referred to the Dutch Presidency texts of 25 April
and 6 June, but we also received, just a few days before the meeting
you attended on 26 July, the Luxembourg Presidency text of 18
July. We now understand that, during the course of the summer,
further texts (including one dated 6 October) have been circulated
in preparation for an extraordinary Energy Council meeting scheduled
for 27 October, at which the Presidency hopes that a Common Position
might be reached.
The Sub-Committee aims to agree a report
based on its enquiry for presentation to the Select Committee
and subsequent publication within the next few weeks. Since this
process will inevitably not be complete until after the 27 October
Energy Council meeting, we set out here the preliminary conclusions
reached by the Sub-Committee. Although conscious that these may
differ in some respects from the final conclusions adopted by
the Select Committee, we hope they will be of some benefit to
you in preparing your negotiating position for the 27 October
meeting. You will of course be sent a copy of the Select Committee's
final report as soon as it is available.
The Sub-Committee welcomes the draft
Directive as an important element in the extension of the single
market to the energy sector. Although we recognise that the Directive
will have only a limited impact on the United Kingdom gas market,
given the domestic legislation that has already taken effect,
we believe that it has the potential to yield some benefits to
the Community. We have noted various criticisms of the text based
on unfavourable comparisons with the liberalised regime being
created in this country, but we believe that, despite its evident
imperfections, it is better to have a Directive subject to such
amendments as it may be possible to obtain, rather than have no
Directive at all.
We consider that the proposed transparency
arrangements, which would require only accountancy separation
between the transportation and supply operations of gas companies,
are inadequate to ensure the emergence of the "level playing
field" required for competition to emerge. We therefore
urge you to continue to press for amendments to require management
separation of these activities or, at the very least, a comprehensive
Chinese wall requirement to ensure that pipeline companies are
prevented from using information obtained from other suppliers
to benefit their own supply activities.
On market opening, our concern is that
competition should be introduced as rapidly and as widely as is
possible. While we accept that it would be difficult to obtain
any radical changes to the figures for market opening or thresholds
contained in the Luxembourg Presidency text of 18 July, we would
still prefer to see either lower thresholds defining eligible
customers, or a shorter timetable, or both-perhaps thresholds
of 25 million m3, 10 million m3 and 1 million
m3, with intervals of three years rather than five
between stages. Notwithstanding any possible price rises that
may result, maximum competition is in the interests of the United
Kingdom, which would benefit directly in the short term by increased
exports of gas to the Continent and from the export of its expertise
in operating in a competitive gas market.
After careful consideration of the arguments
advanced in evidence, we have concluded that considerations relating
to security of supply and investment are not sufficient to justify
indefinite special treatment for companies which enter into long-term
take-or-pay contracts. We accept that derogations should be permitted
in respect of contracts already existing at the time it became
apparent that Community rules for an internal market in gas would
be introduced, but we do not accept that derogations should be
allowed in respect of take-or-pay contracts entered into more
recently or in the future. As to the proposed derogation arrangements,
they have the merit that a final decision on whether a derogation
is to be granted lies with the Commission and not with the Member
State concerned. We also regard the new criterion for granting
derogations included in the 6 October text as a useful addition.
However, we think that, overall, they have a number of unsatisfactory
features. In particular, we believe that the provisions requiring
examination of the extent to which the contract conditions allow
for market changes should be strengthened to make it clear that
the absence of adequate provisions for such changes would be a
bar to the grant of a derogation.
We consider that a number of the procedural
aspects are unsatisfactory. Our particular concerns are as follows.
- The right of the buyer to refuse
access to its pipeline before a derogation is granted enables
the buyer to exercise the right merely as a delaying tactic.
- Because the text does not impose
any time limit within which the Member State concerned must decide
whether it intends to grant a derogation, there are considerable
opportunities for delay.
- The likelihood that decisions
to grant or refuse derogations will be subject to legal challenges
presents further scope for delay.
- Pending final resolution of an
access dispute, applicants for access would be unable to obtain
supplies of gas from any source other than the owner of the pipeline
to which access has been refused.
- Any legal challenge by an applicant
for access would involve the applicant in expenditure of considerable
management time and resources.
Finally, we strongly recommend the Government
to press for the inclusion in the Directive of safeguards to protect
the position of applicants for access. These safeguards might
include constraints on the rights of pipeline owners to refuse
access, such as a requirement that they act in good faith; the
inclusion of time limits on Member States to reply to applicants
for derogations; and the inclusion of a specific right to damages
for applicants who have been denied access in circumstances where
a derogation is subsequently refused either by the Member State
concerned or by the Commission.
I hope that you will find these preliminary
views helpful, and I look forward to hearing from you on the outcome
of the 27 October meeting as soon as possible thereafter. We shall
maintain a scrutiny reserve for the time being.
16 October 1997